Tuesday, February 25, 2014

When it comes time to sell your small business

While many businessmen are drawn to a certain industry or have been drawn into a certain business by their family connections or a specific skill set, another type of business owner is the serial entrepreneur. For this kind of person, the thrill is in starting and building the business, not in the day-to-day maintenance of it. These people are visionaries, not managers or caretakers, and after a few years of success, they're bored and they want out.

Other small businesses sell because there's no one to take on the helm after a long era of family ownership has passed or because they need to relocate or raise funds for living expenses or some other purpose.  The owners, having spent sweat equity building something substantial, now need to recoup their investment with a sale to a good buyer. But how does an owner ensure that he gets a good price for his small business?

Max Friar specializes in the sale of small and medium-sized businesses. His company, Calder Capital, recommends that before a business owner even begins to contemplate selling, he should make sure his company is an owner independent one, and that his involvement in it is not essential to the business's maintenance or profitability. This seems, at first glance, to be counterintuitive thinking. How can a successful person not be essential for the running of a successful business? Because while the business needed a visionary to establish it, it needs a good manager to run it, and good managers are more common than successful visionaries.

Of course, not every business is designed to be sold. Many people start a business as a way of channeling their energies and making everyday expenses. They have no thought of selling because in their minds, their businesses are a natural extension of themselves. Every day men and women retire and their businesses close, and that is the way of the world. But if a business has been very successful and has established a brand that is in demand, there is no reason why someone else should not successfully take it over it and compensate the originator for his vision and hard work.

To be well compensated for his energy, however, the business originator must show that he can transfer the knowledge of how to maintain, at at least current standards, the brand he built. If an owner has his Rolodex "in his head," this is of no use to a buyer because he will not be able to make the connections necessary to run the business. If the owner has his eye on every deal or every transaction, if the business depends on him showing up to work every day and motivating his employees, the business cannot run without him, can't make money without him, and, therefore, without him, is essentially worthless. No one will pay money for it because it's throwing gold down a well.

The steps to take, then, according to Friar, would be to:

  • Make sure that the client base is not small and limited to a few very profitable relationships the owner has cultivated himself. A wider array of customers looks like a safer deal to a buyer wary of an owner taking his business relationships with him. 
  • Put the day-to-day management of the business in the hands of a competent manager who is incentivized to stay with the business after it is sold.
  • Strengthen the business's brand. It goes without saying that a strong brand is essential to a good price.
  • Put all policies and procedures in writing so that your employees and any potential buyers know they are in place already and there are no surprises in transition.
Additionally, any seller should put himself into the shoes of a potential buyer and critically examine his own business for value reducing dependencies. Once those have been addressed, a much better deal can be made and the value of his hard work will be better compensated. And who doesn't appreciate generous compensation?

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